A new paper examines the relationship between the rising concentration in institutional investors’ ownership of publicly traded U.S. firms and portfolio companies’ political giving. Ray Fisman discusses the findings and implications of this research by Marianne Bertrand, Matilde Bombardini, Fisman, Francesco Trebbi, and Eyub Yegen.

This article was first published by the Harvard Law School Forum on Corporate Governance.

Over the past seventy years, institutional investors’ ownership of publicly traded U.S. companies has increased dramatically, from just 6 percent in 1950 to 65 percent in 2017. As a result, a large fraction of the U.S. economy is now in the hands of a relatively small number of asset management companies. The “Big Three” of BlackRock, Vanguard, and State Street Global Investors, for example, held more than 20 percent of S&P 500 shares in 2017 as compared to 5 percent in 1998.

This sea change in the ownership of U.S. corporations has given rise to a discussion among academics and policymakers over its consequences. In “Investing in Influence,” we focus on a particular concern over the rise of institutional shareholders: has the concentration of ownership also led to a concentration of political influence?

Researchers – including ourselves – have traditionally assumed that companies’ political strategies were simply an extension of their profit-maximizing business strategies. Under this view of the world, firms make campaign donations or lobby regulators to secure laws and regulations that are good for company profits. Yet a vast body of research on corporate governance has shown that companies’ goals are driven not by a single-minded focus on corporate profits, but rather a collection of disparate interests of those who wield control over the firm’s resources.

Most obviously, major shareholders – both current and potential – hold enormous sway. Top managers at fund families like Blackrock don’t necessarily own a lot of stock themselves, but they effectively control trillions of dollars of investors’ shareholdings. If funds run for the exit, the stock price will fall, and executive compensation along with it. And executives have enormous incentive to stay on the good side of shareholders even if they are invested for the long term, to try to ensure that their shares vote with management on matters such as board appointments, share buybacks, or merger proposals.  And also on matters of political influence.

If company executives try to keep fund managers happy by, saying, wining and dining them at Michelin-starred restaurants, we might care a little bit (though we imagine Larry Fink can afford to cover his own dinner bill). We’re more concerned if portfolio companies devote firm resources to appealing to fund managers’ political interests.

In our paper, we ask whether the rise in institutional ownership raises concerns with respect to the concentration of political influence (much as others have raised the alarm on the rise of institutional investing and the resultant concentration of economic power). We do so by examining changes in portfolio companies’ political action committee (PAC) spending around block purchases in those companies by large institutional investors.

Specifically, we examine how the relationship between the PAC giving of 13-F institutional investors (those with at least $100 million in assets under management) and the PAC giving of a portfolio firm changes when the investor first acquires a large stake in that firm during the period 1980-2018. We show that when these acquisition events take place, there is a large and discrete increase in the likelihood that the investor and firm both give to the same politician. And conversely, when divestments happen, the opposite is true.

Naturally, investors may decide to buy stakes in companies for which they have a convergence of interests or perspectives – such a coming together of interests (which is not observed to us as researchers) could account for the increased similarity in political giving around an acquisition.

To address these and related challenges, we focus on a subset of investors that are relatively unaffected by such confounds: acquisitions that are driven by stock index inclusions that lead passive investors to acquire stakes in companies simply because their mandate is to track a particular index, like the S&P500 or Russell 2000. We again see a post-acquisition convergence in political giving, which cannot easily be attributed to some unobserved convergence of economic interests or ideology.

Based on the results described thus far it’s impossible to say whether investors influence portfolio company giving or vice-versa – perhaps, for example, investors adjust their political strategy to reflect and reinforce the economic interests of the companies they own. In a further set of analyses, we argue that influence goes in the other direction, as we find that investor giving remains relatively stable around acquisition events, whereas company giving experiences greater change – exactly what we would expect to see if influence went from investor to a newly-acquired firm that must adjust its giving to match that of its new owner.

We see the most important exception as funds that track Environmental, Social, and Governance (ESG) indices, which screen out firms based on their societal impact. Our index fund findings are robust to excluding ESG funds.

It is certainly possible that the apparent influence of large investors takes place without any direct efforts on the part of institutional investors – for example, portfolio companies may preemptively cater to investors’ preferences (political or otherwise) in hopes of gaining their support, for example in important votes at shareholder meetings. However, consistent with a more active voice from institutional investors, we show that the correlation in political giving increases even more sharply after an investor gets a seat on the board.

Our main results don’t really speak to the benefits that asset managers may obtain by amplifying their political preferences. These may be financial, if the PAC giving of institutional investors is driven primarily by their attempts to influence the legislative and regulatory process to increase their profits. But the benefits could be non-pecuniary, to the extent that institutional investors’ PAC giving reflects the personal preferences of their managers and owners. We offer suggestive evidence that personal preferences may play a role: specifically, we find that our main result on the convergence in political giving is more pronounced for investors that are more partisan in their own PAC political giving. To the extent that such partisanship reflects investors’ personal agendas, rather than efforts at influencing legislative and regulatory processes to increase profits, this result suggests an amplification of the personal politics of those that run asset management companies.

We opened with the observation that institutional investors hold an ever-larger share of publicly traded firms. This trend was accompanied by an increase of nearly a factor of six in total expenditure on political activity by the firms we study, for the years 1980-2018. While there are surely many factors that contribute to these patterns, we conclude by observing that increased institutional investment may be at least in part responsible for the expansion in the corporate political footprint. We show that higher institutional ownership is associated with an increase in giving by the firm, and furthermore that this expansion is unrelated to portfolio firms’ own financial interests (which we measure by whether donations go to members of committees lobbied by the firm). These final results reinforce the view that the ownership-driven shifts in political donations may not serve to increase firm profits, but rather serve fund managers’ own political agendas.

The rise of institutional ownership is rightly attracting a lot of scrutiny for the implications for financial markets and the economy more broadly. Our findings suggest that these concerns are well-grounded, in the sense that institutional owners do impact the policies of portfolio firms rather than passively allowing corporate executives to do as they please. Furthermore, our findings indicate that concerns over institutional investors’ takeover of U.S. corporations should extend to the political sphere as well.

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